Hold economists accountable too

Eight months before the upcoming WTO ministerial of December 2005, prominent economists are
closing ranks to dwarf sustained criticism of agricultural subsidies in developed nations.
Devinder Sharma
asserts that the continued undermining of food self-sufficiency in developing nations is
economic lunacy.

Just before the failed Cancun WTO Ministerial in September 2003, there was a flurry of activity in the economic circles. Studies came out concluding that any drastic reduction in agricultural subsidies in the rich and developed countries would not make any appreciable impact on the global commodity prices. The timing of the reports was crucial.

The underlying premise was crystal clear. Prominent economists in the developed countries (and their clones in the developing countries) had ganged up to throw a protective ring around much of the US $ 320 billion agricultural subsidies that farmers (in reality the big transnational companies) in the OECD  Organisation for Economic Cooperation and Development -- were getting.

It is now the turn of the Columbia University professor, Jagdish Bhagwati, to join the bandwagon. Writing in the Far Eastern Economic Review (and quoted in the Economist March 23, 2005), he says: "Agricultural subsidies are certainly undesirable. But the claim that removing them will help the poorest countries is 'dangerous nonsense' and a pernicious fallacy." His colleague, Arvind Panagariya, defends it further by arguing that these subsidies make food cheaper for the importing countries. The timing is again perfect. The next WTO Ministerial is scheduled to be held at Hong Kong in December 2005.

Bhagwati's colleague Arvind Panagariya also uses the same fallacious argument: "A study in
1999 found that 33 of the 49 poorest countries import more farm goods than they export; 45 of
them are net importers of food. Subsidies depress the price of agricultural products on world markets. That hurts rival exporters, as Burkina Faso can testify. But importers gain."

Jagdish Bhagwati holds several eminent positions, including member of UN Secretary General Kofi Annan's high-level advisory group of the NEPAD process in Africa. As a former external adviser to the director general of the WTO, special policy adviser to the UN on globalisation, economic policy adviser to the director-general of the erstwhile General Agreement of Tariffs and Trade, I thought he would have by now realized the fallacy of thrusting an unjust globalisation and that too by creating an illusion of reducing poverty, eliminating hunger and leading to economic growth for all.

Bhagwati agrees that agricultural subsidies are 'undesirable'. But in the very next sentence makes a complete turnaround and defends the subsidies by saying that it would make food expensive for the net food importing countries, and therefore terms the demand for its scrapping as a 'dangerous nonsense'.

This reminds me of the hypocrisy of the developed countries that had been earlier echoed by the former World Bank Chief Economist Nicholas Stern. While travelling through India sometimes back, he had denounced subsidies paid by rich countries to their farmers as "sin ...on a very big scale" but warned India against any attempts to resist opening its markets. Developing countries must remove their trade barriers regardless of what is happening in the developed countries.

In reality, what Jagdish Bhagwati now calls as "dangerous nonsense" is actually a reflection of the economic lunacy that he finds himself and his tribe in. The growing anger against the fundamentally unsound economic prescriptions being doled out by these economists has already pushed at least 54 of the developing countries into what I call as a 'dark age'. A majority of the developing countries have now become net food importing countries thereby gradually destroying the food self-sufficiency so assiduously achieved. Economists therefore are now desperately searching for alibis that can protect them from public slur.

The underlying premise is the same: agricultural subsidies in the rich and developed countries should not be scrapped.

The Indian and Chinese counter examples

But before we move to look at how western subsidies are impoverishing farmers in the developing countries,
let me answer this. There is no denying that some of the least developing countries are dependent upon food imports. Good economics would surely aim at pulling these countries out rather than pushing them perpetually into the dependence syndrome. Needless to say these countries need to emerge out of the 'dark age' and become economically strong. This can only happen if the world agrees to cooperate and join hands in puling them out of the economic morass. And if you are wondering how this can be attempted or achieved, let me take you back to the times when India and China  a third of world humanity --- literally emerged out of hunger and starvation.

Indias independence came in the backdrop of the Great Bengal Famine. Soon after Independence, India had begun to seek food aid and, in fact, emerged as the biggest food importer of the twentieth century. After all, for a country literally on a 'ship-to-mouth' existence, there was little hope. The political ramifications of importing food were felt by the then prime minister, late Jawaharlal Nehru. It was as early as in 1955 that Nehru realized the pain of being food dependent, and in his Independence Day address from the ramparts of the Red Fort, he said: "There is nothing more humiliating for any country than to import food. Therefore everything else can wait, but not agriculture".

I am glad that Jawaharlal Nehru steered a different course. Otherwise, India would have remained a 'gone case' as most of the Sub-Saharan Africa is today referred to. Nehru and his able successors followed the reverse route to globalisation to attain economic sovereignty. Lal Bahadur Shastri and Mrs Indira Gandhi later laid the foundations of a 'famine-avoidance strategy' to take India out of the blue and turn the country food self-sufficient. The strategy included raising tariffs to ensure that cheaper imports do not marginalise the farming communities. Given the right policy framework and incentives, the Indian farmers did the rest.

China too followed almost the same agricultural path to growth. Despite hiding behind the bamboo curtain, China's remarkable turnaround in agriculture laid the strong foundations for economic and political sovereignty. Both China and India have conclusively demonstrated how important it is for any country to get out of the dependency syndrome. Both these countries couldnt have emerged on the global map if they had followed the misguided path that IMF/World Bank and mainline economists have been relentlessly pursuing. If India and China could do it, and do it so effectively, why can't the same model apply for the rest of the developing world, including Africa? Isn't it economic insanity to suggest dismantling a food self-sufficiency structure that virtually saved a third of humanity from being led to a slaughter house?

And that makes me wonder whether there is truth in the words of the father of India's white revolution, fondly called as the 'milkman of India', Dr Verghese Kurien, when he said: "I am credited with having a public statement  which, incidentally, I have not denied yet  that a world without economists would be a lot better place for the human kind. May the tribe perish  for they never are there where the action is."

The realities of 'cheap food'

Let us now understand the realities of cheap food. First let us look at how the prevailing subsidy structure is making our food grains uncompetitive in the developed countries. Surprised? Well, that is why it is kept hidden from the public gaze.

Take rice as an example. An average Indian farmer produces a kilo of paddy at approximately Rs 6.25. Taking the prevailing conversion rate of Rs 44 for a US dollar, each dollar would buy roughly seven kilos of paddy. Can the economists tell us where in the developed world can you get seven kilos of rice for a dollar? How come than the Indian farmer is then priced out of the market? In that case, isn't there something terribly wrong with the way economics is dictating the trade agenda? Even in the retail market, a kilo of rice is available for Rs 10, which means you can get more than four kilos for a dollar. On the other hand, look at the retail market in the UK. A kilo of rice is available at 2.54 pound sterling, good enough to buy 20 kilos of rice from India.

European and American consumers stand to gain immensely if they were to scrap the monumental domestic support to their farmers. Firstly it will mean that the tax payers in these countries do not have to support inefficient and environmentally-unfriendly production systems in their own countries. And then, if the US were to instead import its entire rice requirement it would be available at much cheaper price than what the American consumers are now paying. Isn't it economically foolish therefore to follow a marketing system whereby the total rice output of the United States is worth US $ 1.2 billion and the subsidies paid to rice growers stands at US $ 1.4 billion?

Do US consumers realize that they can collectively save at least US $ 1.4 billion every year on rice by refusing to subsidize their producers? Cheaper imports from the developing countries will further lower the retail price of rice. It would surely price out domestic rice producers but the real beneficiaries would be the consumers. And in turn it would help millions of small rice producers in the Asian countries, who would then be able to find a substantial export market thereby raising incomes.

Withdraw the agricultural subsidies, and developed countries will hold no comparative advantage for most of the crops. That is why mainline economists do not compare the cost of production of agricultural commodities, but look invariably at the supply chain management.
 Entitled to subsidies
 Faulty frame, savage reality

Let us take yet another example. If you are wondering as to why Indian pea producers are unable to competitively bid for processed foods in the global market, let us see how Denmark, for instance, manipulates the market and that too by truly following the WTO norms.

Danish pea farmers do not benefit from price subsidies. Danish split pea processing companies do not benefit from processing and marketing aids. Danish pre-cooked split pea exporters do not benefit from export refunds. So obviously, you will think that they are very efficient producers and of course very competitive. But hold on.

Since pea farmers do not have to recover their full production costs from the sale price of the peas supplied to processing companies, the price at which pea is supplied to processing companies is substantially reduced. As a consequence, the price at which pre-cooked split peas is offered for sale is substantially below the prices that Indian pulse growers can offer. The provision of direct payments thus enables Danish suppliers of pre-cooked split pea to capture markets, which they would never have been able to supply in the absence of the aid payments.

Let me make it very clear. The comparative advantage that is cited by developed countries is actually built on agricultural subsidies. Withdraw the agricultural subsidies, there is no comparative advantage left for most of the crops, and I repeat, for most of the crops. That is why the mainline economists do not compare the cost of production of agricultural commodities but look invariably at the supply chain management.

No wonder, pea imports into India have multiplied four times in the past five years. While the Indian pea producers have been priced out by the subsidies imports, the Danish consumer has in reality paid more for the pea they consume. If only Denmark had stopped making direct payment to pea growers, and instead imported pea at a much lower available price from India and Africa, the saving for Danish household would have been enormous. Isn't that sound economics? But then, market economy as we well know now does not operate anymore on common sense.

What happens when these cheaper and highly subsidies agriculture imports come into the developing countries? The small and marginal farmers who have been cultivating these crops are the first ones to be thrown out of its cultivation. Gradually they abandon farming and migrate to the urban centers looking for menial jobs. Even if the food is available at low prices they often do not have the means to buy it. The reason is simple; unlike the industrialized countries, the producer in the developing countries is also the consumer. Unless he first produces and earns his livelihood he cannot afford to meet his other needs from the market.

It is for this reason that some 320 million people, a third of the world's 840 million hungry, go hungry in India. It is not because there is not enough food in India. It is because these people cannot buy food even at 'below the poverty line prices'. They do not have the money to buy food that the government has otherwise made available for them. What they need is a job with a reasonable income and that can come only from agriculture. After all in a country which has 600 million dependent on farming, and every fourth farmer in the world being an Indian, there is no other way to provide productive employment for all than to make agriculture more attractive.

How this iniquitous system persists

For the 45 poorest and net food importing countries, the right path is not to remain dependent upon food imports from the United States and the European Union but to close the national borders by raising tariffs and to bring in policies and support mechanism that provide an enabling environment for their farmers to grow more. If Indian and Chinese farmers could bring in food self-sufficiency, there is no reason why the African farmers cannot become economically viable.

But that will not be allowed to happen. Mainline economists are working overtime to ensure that globalisation increases dependence of more and more developing nations on the agribusiness corporations. One such way is to denounce the input subsidies paid to developing country farmers and label it as 'trade distorting'. At the third annual international conference on 'policies against hunger', organized by the German government at Berlin in October 2004, John Nash, a World Bank economist was at pains to defend the domestic subsidies being doled out to European Union farmers. In 1999, 56 per cent of all EU agricultural expenditure of approximately 78 billion euros was in the form of direct payment to farmers.

These subsides are believed to be non trade-distorting and therefore are justified. At the same time, the indirect input subsidies that the developing country farmers receive were painted as the villain of the free trade regime and needed to be immediately discontinued according to the economist. Asked what the developing countries should do in the event of withdrawal of the miniscule agricultural support being made available through cheaper farm inputs, he replied: In the World Bank's thinking, the best way to encourage agriculture in the developing countries is to shift the farm subsidies to laying out rural infrastructure like link roads, providing electricity etc.

In simple words, infrastructure development is the surest way to make agriculture productive, he concluded. If rural infrastructure is what is needed to prop up agriculture than you will agree that the rich industrialized countries have already got a well-knit infrastructure in place, this writer said, and asked: Why do the European farmers or for that matter a few million farmers on either side of the Atlantic should then be getting such huge support as direct payments?

You guessed it right. John Nash very conveniently ignored to answer the question. Does it not mean that in the name of free markets the developed countries actually practice 'socialist' agriculture? How can those who swear in the name of market economy actually keep their own farming systems inside a well-fortified closed circuit?

If only each country was encouraged to have a food production and management system that allows its farmers to produce for the nation's requirements, the world wouldn't have witnessed the kind of inequality that prevails and the resulting terrible socio-economic consequences.

In other words, the rich and developed countries have perfected a well-established state intervention programme to ensure that their farmers get a minimum level of income. Markets therefore have no meaning for the developed country farmers. These farmers, whether they live in the US, France, Germany, Switzerland, Japan or Australia, are financially insured and insulated from the volatility of the global markets. It is only the poor farmers in the developing countries who are being forced to face the vagaries and cruelty of the markets. For the rich, the scandalous cover of green box subsidies protects direct payments. For almost 3 billion farmers in the developing world, even their own governments (based on the faulty advice of the mainline economists), are refusing to address the consequences of the grossly uneven playing field to which they are being exposed.

Instead, an unnecessary fear is being created over rising food prices for
the urban poor. The food scare is aimed at the urban middle class knowing
well the political clout they wield in the developing economies. Jagdish
Bhagwati has surely played his cards well. He knows that the G-20 countries,
for instance, will not be able to antagonize their own middle class. G-20
countries will therefore not be able to push for scrapping domestic
support - provided through 'green box' and 'blue box' --- beyond a point and
that remains the last hope for protecting the western agriculture
subsidies.

The globalisation that the neoliberal economists are trying to justify takes away jobs for farmers in developing countries. Further, the poor in the urban centres therefore become eternally dependent upon cheap and subsidized food. These imports themselves are the outcome of a vicious cycle that the mainline economists have spun in the name of globalisation. If only each country was encouraged to have a food production and management system that allows its farmers to produce for the nation's requirements, the world wouldn't have witnessed the kind of inequality that prevails and the resulting terrible socio-economic consequences.

But hold your breath. While we debate the issue of agricultural subsidies, the International Food Policy Research Institute in Washington DC, and some other economists at Cornell University, already have begun demanding subsidies for their consumers. In reality it means subsidizing the expansion of the food super markets. If nearly 80 per cent of the agricultural subsidies are cornered by big farms and agribusiness corporations, an equal amount of consumer subsidy would be eaten by the WalMarts. Wait and see how mainline economists will further justify the demand for the sake of the food retailers.

Economists must be held accountable too

Millions are meanwhile being pushed into penury with each passing year. Millions are being driven away from their only means of livelihoods and thousands are perishing, as the mainline economists continue to misguide the political leadership. And that makes me wonder when will we begin to hold the economists accountable? After all, if a bridge collapses, we prosecute the engineers. If a doctor is held responsible for the death of a patient, we take him to court. Hundreds of thousands of people have silently suffered and continue to pay the price of faulty economics. Why should only economists be allowed to go scot free? Why can't we hold them responsible?

The world has suffered enough from economic lunacy. It is time to stand up and make mainline economists accountable.
⊕

Devinder Sharma is a food and trade policy analyst. He also chairs the New Delhi-based Forum for Biotechnology & Food Security. Among his recent works include two books GATT to WTO: Seeds of Despair and In the Famine Trap.

References

1. Mark Malloch Brown, administrator of the UN Development Program, while releasing the annual Human Development Report had said: "In the so-called great decade, a very significant hard core of countries ended further behind with more poor people."
2. Sharma, D. 2003:  WTO and Agriculture: The Great Trade Robbery published on Z Net, Sept 2 http://www.zmag.org/content/showarticle.cfm?SectionID=13&ItemID=4121
3. Sharma, D 2003: Politics of Diversity and Food Security chapter in the book The Value of Nature: Ecological Politics in India, edited by Smitu Kothari, Imtiaz Ahmad and Helmut Reifeld, Rainbow Publishers New Delhi
4. Kurien, V 1997: An Unfinished Dream, Tata McGraw Publishing Company Ltd., New Delhi
5. Sharma, D 2005: Montek's warped policies, Deccan Herald, Bangalore, Feb 5 2005
6. For more about the scandalous jugglery of the 'green box' payments and how it impacts the developing country farmers, see the author's article: Green Box subsidies must go. Economic and Political Weekly, May 15-21, 2004
7. IMF working paper 03/110

Q&A

Editors: You say that G-20 country governments like the Indian government can
go only so far in their criticism of western agricultural subsidies, and
no further, because they may risk antagonizing their own middle class
consumers. Can you connect the dots for us. Are you saying that as long as
imported food grains and pulses are price competitive to local produce,
domestic consumers wouldn't care and would prefer to have those choices?
Are domestic consumers in India already purchasing substantial amounts of
imported food grains (if you know)? (Editors)

Devinder Sharma:
Let us take an example of edible oil imports into India. India was almost
self-sufficient in edible oil production in 1993-94. This was the outcome of
Rajiv Gandhi's 'Oilseeds Technology Mission', which was launched in 1985
after he became the Prime Minister. Before 1984-85, India was importing
between Rs 1500-3000 crore of edible oils every year.

In 1993-94, the Commerce Ministry lowered the custom duties saying that the
market price of edible oils is increasing. Imports were therefore allowed.
Within a year, the imports soared to Rs 1 crore. But the price for the
consumer had not come down, as the trade blended the imported oil with
domestic production and sold it at the same inflated price. It was then that the
Ministry of Agriculture pressed the panic button. And yet, the Commerce
Ministry went on lowering duties year after year. The result is that today
we import roughly 50 per cent of our edible oil requirement, some 5 lakh
tonnes at a cost of Rs 12,000-crore. (1 crore = 10 millions, 10 lakh = 1 million)

In short, Rs 12,000 crore are being given to edible oil producers in
Malaysia, Indonesia and Brazil. The same money could have been paid to
Indian farmers. After having destroyed our own 'yellow revolution', the
government is now talking of bringing in genetically modified seeds to
improve production!

Imports of other agricultural products are also increasing in the country.

Some economists have been saying that the government should import cheaper
food (so what, if it is cheap because of subsidies) and gradually get out of
agricultural production. But the point that is being missed is what will the
nation do with the 600 million dependent on farming? Do we have alternate
employment opportunities for them?